Oil drops on US budget concerns

Oil prices fell nearly 1 per cent to hit the lowest level in 12 days on fears of a looming US budget crisis and government data showing a healthy build in gasoline stockpiles.

Oil markets, which have been closely tracking efforts by the US Congress to avoid the "fiscal cliff" that could potentially cause a recession, gave up some early losses after US House Speaker John Boehner voiced optimism that Republicans could broker a deal with the White House.

Traders have been focussing on US and global economic conditions amid concerns about struggling fuel demand. Additional pressure came from data from the US Energy Information Administration, which showed a steep build in domestic gasoline stockpiles last week and weak consumption.

"Boehner said there was some progress in the talks, and I think the market has kind of rebounded with some of the new shorts covered," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

However, he added: "The build in gasoline weighed on the gasoline market, and we saw pretty weak demand in both distillates and gasoline."

Further pressure came from Commerce Department data showing new US single-family home sales fell slightly in October. The prior month's pace of sales was also revised sharply lower, casting a small shadow over what has been one of the brighter spots in the US economy.

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Brent crude fell 99 cents to trade at $US108.88 a barrel by 12:46 p.m. EST (1746 GMT), breaking below the 20-day moving average of $US109.35, where losses had stalled on Tuesday.

US crude shed 88 cents to trade at $US86.30 a barrel, dropping firmly below the 14-day and 20-day moving averages of $US86.68 and $US86.53 a barrel, respectively.

US RBOB gasoline futures led the complex lower, down more than 1 per cent at $US2.703 per gallon.

Middle east

While economic worries continue to keep demand concerns at the fore of markets, traders have also been watching the mounting political crisis in Egypt and escalating violence in Syria for signs of increasing risks to supplies.

Hundreds of demonstrators were in Cairo's Tahrir Square for a sixth day on Wednesday, demanding President Mohamed Mursi rescind a decree they say gives him excessive powers, while two of Egypt's top courts stopped work in protest.

Adding to concerns, the Muslim Brotherhood and hardline Salafi parties will hold protests across Egypt on Saturday in support of Mursi.

"The Middle East looks set to be a major source of uncertainty in the New Year," said David Hufton, managing director at PVM, in a note.

"That provides a key support for oil prices and could well sabotage even the most persuasive set of bearish physical supply/demand figures."